These days we are getting a proper illustration of the Chuck Norris effect – that the central bank can ease monetary policy through sheer credibility without even printing more money. In fact in the case of Mark Carney he is now easing monetary policy in the UK even before he has become Bank of England governor. That is pretty impressive, but also good news for the UK economy. It is of course the expectation that Mark Carney as coming BoE governor will be in charge of introducing some form of NGDP level targeting.
This is from Bloomberg today:
“U.K. inflation expectations rose to the highest level in 21 months amid speculation Mark Carney will expand monetary policy and spur price rises when he takes over as Bank of England governor in July.
The so-called break-even rate increased for a fifth day before Carney testifies to U.K. lawmakers this week after telling the World Economic Forum’s annual meeting in Davos, Switzerland, last month that policy in developed countries isn’t “maxed out.” Ten-year bonds fell after an industry report showed U.K. services expanded in January, undermining demand for fixed-income assets. The pound weakened against the euro.”
Market expectations of inflation in my view are one of the best measures of changes in the monetary policy stance. When inflation expectations are inching up it is a very clear indication that monetary conditions are getting easier. That is what is happening in the UK at the moment.
Central banks essentially have two monetary policy instruments. First of all they can print money – increase the money base. Second they can guide expectations. The latter is often much more important and that is exactly what we are seeing in the UK markets these days.
Effectively Mark Carney is already in charge of UK monetary policy – the only thing he has to do is hint what he would like to see happen with UK monetary policy going forward.
The Market Monetarist 
Marcus Nunes
/ February 5, 2013The “CN efeect” is pervasive. Remember what happened in late August 2010 when at the JH conference Bernanke ‘hinted’ about QE2? Stocks and inflation expectations went up!
Pity he later (november) ‘circumscribed’ the action very narrowly.
Lars Christensen
/ February 5, 2013Marcus, you are very right about that. The effect of the Jackson Hole speech is documented in my initial MM working paper:
Click to access market-monetarism-13092011.pdf
Page 7-9 (but you of course knows that very well…)
Britmouse
/ February 5, 2013Good news indeed! (The 21 months statistic is a little overstated; the market was pricing in an RPI methodology reform which got cancelled, that “artificially” raised expectations by about 0.5% in January.)
Britmouse
/ February 5, 2013Having said that, the domestic stock market (FTSE 250) is giving good cause for optimism as well.
Lars Christensen
/ February 5, 2013Britmouse, you are very right. I actually initially wanted to write this story, but then the ONS debacle on the inflation benchmark for UK linkers made me give it up, but since inflation expectations continue to inch up I jumped on the story.
That said, the story from the stock market and the FX markets is telling the same story even though I there is a lot of other factors moving those markets – particularly what the Fed and the BoJ is doing. Said in another way if the BoE in fact where to implement NGDP level targeting then there would a lot more to be priced in by the markets.